Interesting Facts About the Student Loan Debt Bubble

The Daily Reckoning

Apr. 30, 2012, 1:13 PM

Nothing much happened last week. Except that Ben Bernanke told investors that the fix was in…and the stock market went up. The chief of America's central bank told the world that he was prepared for more QE whenever it was needed.

When will it be needed? When the stock market goes down!

So, why not? Why not buy stocks? What can you lose? If they go up, you keep the gains. If they go down…ol' Benny will be there with wads of cash to buck them up.

Cash…cash…cash… How much do you need?

A million? A billion? A trillion? Hey, the sky's the limit. Bernanke is ready. As much as you need…when you need it.

After so many years of fixes (it's been 5 years since the subprime crisis began) we're getting to know how the fixes work.

Let's start with the money. When a fix is needed, the feds come up with money. But everyone knows the feds are broke. So where does the money come from?

"Out of thin air," was an expression used by John Maynard Keynes. But how could that be? How can you get cash…money…out of nowhere? And what kind of money could it be…if you could get it at no expense? It must be a "funny" money…a zombie money…

It must be worthless, right? But it's not. That's the crazy thing…the Fed plucks this money out of the air…gives it to banks…and they can use it to pay for a pizza. Or an automobile. Or a sovereign bond.

The problem — especially now in Europe — is that the money that comes from nowhere goes nowhere. The ECB lent it to the banks. The banks lent it to the government. And pfhhht! It was back to where it came from — nowhere.

Now, The Financial Times reports that the banks are down to their last few billion. Snniff. Sniffle. Poor bankers. They better save their last billions to pay bonuses.

That's what they're thinking too. They're not buying government bonds the way they used to. Trouble is, the governments of Spain, Italy and others need the money. So, they go to the European central bank and ask for more of that 'nowhere money':

"You gotta give these banks more money so they can give us more money… Otherwise, we're going to default…and you can say goodbye to Europe…"

Whether that would be good or bad, we don't know… We're still wondering where that money came from. Where, exactly, is nowhere?

How could there be a place…like…nowhere? We mean, if it is nowhere…it can't be somewhere. So there can't be a place that is also nowhere. So, if money really does come from nowhere it is…like…really not there.

Can someone help us with this?

Lately, we've come to the conclusion that this whole thing is a scam. The money is a scam. The economics behind it is a scam. The way it is lent out…is also a scam.

Let's look again at where the 'nowhere' money goes…

In short, it is used by the insiders to scam the outsiders. Those who control the government scam those who don't. It goes to zombie industries — finance, health, education and the military.

In the news lately is the plight of the students. Everybody tells them they should go to college. But college is expensive. And since nobody has any money in America, they have to borrow. They end up with a worthless college degree and, on average, about $25,000 in debt.

The scam takes place on several levels. The whole nation gets scammed into thinking that "education" is a good thing.

Here's a typical newspaper article, this one from The Wall Street Journal:

"Education Slowdown Threatens US"

"Throughout American history," the article begins, "almost every generation has had substantially more education than that of its parents. That is no long true. When baby boomers born in 1955 reached age 30, they had about two more years more schooling than their parents, according to Harvard University economists Claudia Goldin and Lawrence Katz… But in 2010 they averaged only about 8 months more schooling than their parents."

The article goes on to tell us that college graduates have less trouble getting a job than those who only graduated from high school. But so what? Suppose everyone had a Ph.D. Would jobs suddenly appear for them?

"The wealth of nations is no longer in resources. It's no longer in physical capital. It's in human capital," says an expert quoted by the paper.

Elsewhere in the blahblahsphere, Larry Summers, former secretary of the Treasury, challenged Mitt Romney to present a budget plan, which among other things, included more "investment" in…yes…you guess it…education!

But "investments" in education have been increasing for the last 40 years…and for the last 40 years…there has been not one penny of return.

So, let's follow the money. The feds give students money…or give it to the universities directly. Either way, it ends up in the pockets of the education industry. Unemployment has gone up and down…with no relation to the supposed investments in education. Employees — including those with college degrees — have not earned a penny more in real hourly wages. And test scores show they don't know anything more than they did, at far lower investment, 4 decades ago.

Investments in education are losers. Why invest more?

Because the money comes out of nowhere. It's nowhere money. Might as well bailout the financial industry. And "invest" in healthcare too.

But the nowhere money is not with no cost. It looks just like other money. And it buys the same things. So, the guy who has it is able to use it to take away resources from other people.

Follow the money. From the Fed to the feds…to the favored, no-return industries — health, education, finance and the military.

The zombies get more money. The rest of the economy ends up with less.

And now, much of the cost rests on the shoulders and backs of young people in the form of unpaid student loans, from MSNBC:

Here's what we do know about student loan debt: it's roughly $1 trillion in size, greater than either auto or credit-card debt and second only to mortgage debt in the US.

Borrowers in their 30s today owe $28,500, on average. The debt burden has soared just as — and partly because — the recession hit, so younger graduates carrying the highest balances are hit with the double whammy of a weak job market (that still isn't showing any sign of rapid improvement).

And this all comes as globalization and technological change have upended once-reliable career paths, wiped out many mid-level professional jobs and leave low-paying fields in health, food and beverage services, and retail as among the fastest growing job markets over the next decade.

Oh, and consider that student loan debt remains one of the most difficult types to forgive or discharge in bankruptcy, in part because the federal government (i.e. taxpayers) made or guaranteed 80 percent of all outstanding student loan debt as of last year. And finally, that once loans in deferral or forbearance are excluded, the delinquency rate on student loan debt was an estimated 27 percent as of the third quarter of 2011, according to a study by the New York Fed.

Esquire magazine has another angle. Here's a question for you. How come the feds give old people drugs — free…but when it comes to college education, it forces the young folks to borrow? Simple, the young don't have as much voting power. They're outsiders. Here's what has happened to them.

Twenty-five years ago young Americans had a chance.

In 1984, American breadwinners who were sixty-five and over made ten times as much as those under thirty-five. The year Obama took office, older Americans made almost forty-seven times as much as the younger generation.

This bleeding up of the national wealth is no accounting glitch, no anomalous negative bounce from the recent unemployment and mortgage crises, but rather the predictable outcome of thirty years of economic and social policy that has been rigged to serve the comfort and largesse of the old at the expense of the young.

Since the beginning of the Industrial Revolution, human potential has been consistently growing, generating greater material wealth, more education, wider opportunities — a vast and glorious liberation of human potential. In all that time, everyone, even followers of the most corrupt or most evil of ideologies, believed they were working for a better tomorrow. Not now. The angel of progress has suddenly vanished from the scene. Or rather, the angel of progress has been sent away.

Nobody ever talks about generational conflict. Who wants to bring up that the old are eating the young at the dinner table? How are you going to mention that to your boss? If you're a politician, how are you going to tell your donors? Even the Occupy Wall Street crowd, while rejecting the modes and rhetoric and institutional support of Boomer progressives, shied away from articulating the fundamental distinction that fills their spaces with crowds: young against old.

The gerontocracy begins at the top. The 111th Congress was the oldest since the end of the Second World War, and the average age of its members has been rising steadily since 1981. The graying of Congress has obvious political ramifications, although generalizations can be deceiving. The Republican representatives tend to be younger than the Democrats, but that doesn't mean they represent the interests of the young. The youngest senators are Tea Party members, Mike Lee from Utah and Marco Rubio from Florida (both forty). Here's Rubio: "Americans chose a free-enterprise system designed to provide a quality of opportunity, not compel a quality of results. And that is why this is the only place in the world where you can open up a business in the spare bedroom of your home." He is speaking to people who own homes that have empty spare bedrooms. He will not or cannot understand that the spare bedrooms of America are filling up with returning adult children, like the estimated 85 percent of college graduates who returned to their childhood beds in 2010, toting along $25,250 of debt.

David Frum, former George W. Bush speechwriter, had the guts to acknowledge that the Tea Party's combination of expensive entitlement programs and tax cuts is something entirely different from a traditional political program: "This isn't conservatism: It's a going-out-of-business sale for the Baby Boom generation." The economic motive is growing ever more naked, and has nothing to do with any principle that could be articulated by Goldwater or Reagan, or indeed with any principle at all. The political imperative is to preserve the economic cloak of unreality that the Boomers have wrapped themselves in.

Democrats may not be actively hostile to the interests of young voters, but they are too scared and weak to speak up for them. So when the Boomers and swing voters scream for fiscal discipline and the hard decisions have to be made, youth is collateral damage. Medicare and Social Security were mostly untouched in Obama's 2012 budget. But to show he was really serious about belt tightening, relatively cheap programs that help young people like the Adolescent Family Life Program and the Career Pathways Innovation Fund were killed.

His intentions may be good — he may want to increase support for AmeriCorps — but the program shrunk last year. Three quarters of the applicants were turned away. He resisted Republican efforts to slash Pell grants by $845 per student, but then made other changes to the program that will save the government — or cost students, depending on your perspective — a projected $100 billion over ten years.

The youth vote still supports Obama, but in a chastened, conditional way. In hindsight, Obama's 2008 campaign looks like an indulgent fantasy in which the major conflicts in life simply don't exist. There may be no white America and no black America, no blue-state America and no red-state America, but one thing is clear: There is a young America and there is an old America, and they don't form a community of interest. One takes from the other. The federal government spends $480 billion on Medicare and $68 billion on education. Prescription drugs: $62 billion. Head Start: $8 billion. Across the board, the money flows not to helping the young grow up, but helping the old die comfortably. According to a 2009 Brookings Institution study, "The United States spends 2.4 times as much on the elderly as on children, measured on a per capita basis, with the ratio rising to 7 to 1 if looking just at the federal budget."

The biggest boondoggle of all is Social Security. The management of entitlement programs, already weighted heavily in favor of the older population, has a very specific terminal point that coincides neatly with the Boomers' deaths. The 2011 report by the Social Security trustees estimates that, under its current administration, the fund will run out in 2036, so there's just enough to get the oldest Boomers to age ninety.

Only 58 percent of Boomers have more than $25,000 put aside for retirement, so the rest will either starve or the government will have to pay for them. But the government's future ability to pay is decreasing rapidly precisely because the Boomers splurged so heavily during the Bush and Clinton years. Public debt per person in the United States currently stands at $33,777. George W. Bush inherited a public-debt-to-GDP ratio of 32.5 percent and brought it up to 54.1 percent during a period of economic growth. (The money borrowed from the future paid for massive tax cuts, with no serious reductions in domestic spending, two expensive wars, and a prescription-drug benefit added to Medicare.) Under Obama, the debt-to-GDP ratio has risen to 67.7 percent and is projected to rise to 74.2 percent this year.

This is no conspiracy; no nefarious backroom deal by political and corporate overlords. The impasse of the moment is, tragically, the result of the best aspects of the Boomers' spirit. The native optimism that emerged out of the explosively creative postwar world led them to believe that growth would go on forever; that peace and prosperity were the natural state of things. Their good intentions seem like willful naiveté today, but the intentions were genuine. Clinton actually believed that globalization would export the First World rather than bring the Third World home; it did both. The prescription-drug benefit was the "compassion" in compassionate conservatism. All those tax cuts were intended to liberate opportunities, not destroy them.

Cynicism rises to fill the emptied space of exaggerated and failed hope. It's all simple math. If you follow the money rather than the blather, it's clear that the American system is a bipartisan fusion of economic models broken down along generational lines: unaffordable Greek-style socialism for the old, virulently purified capitalism for the young. Both political parties have agreed to this arrangement: The Boomers and older will be taken care of. Everybody younger will be on their own. The German philosopher Hermann Lotze wrote in the 1870s: "One of the most remarkable characteristics of human nature is, alongside so much selfishness in specific instances, the freedom from envy which the present displays toward the future." It is exactly that envy toward the future that is new in our own time.

And we will not talk about any of it. We will keep mum. We will hold our tongues lest we seem ageist, lest we seem bitter, lest we seem out of touch, lest we seem pessimistic, lest we seem divisive.